How Obama Will Change Your Taxes

WASHINGTON, D.C.--The $787 billion stimulus package passed in February and President Barack Obama's budget plan released on Thursday contain a confusing assortment of changes to the tax code.

Some will see their taxes go down this year, especially those earning less than $100,000 a year. Beginning in 2011, when Obama hopes the recession will be a fading memory, some people, especially those earning more than $200,000 a year, will see their taxes go up.

For the vast majority of Americans, the biggest change is the Making Work Pay tax credit, included in the stimulus. Individuals earning up to $75,000 will receive $400 back from the government. Families earning up to $150,000 will get $800 back. (For individuals earning between $75,000 and $95,000 and couples earning between $150,000 to $190,000, the credit will gradually phase out.)

This is almost exactly the tax cut Obama promised on the campaign trail--the size of the cut was reduced by Congress to $400 from the $500 Obama had wanted. The tax cut is structured so that families that already pay no income tax still receive the credit. A family earning $35,000 with two children would owe no income tax and would, in fact, receive $4,100 in refundable tax credits under the administration proposal. Under prior law--before the stimulus--they would have received just $2,900 from the government.

At higher income levels, however, taxes will get complicated quickly. Many of the specific tax breaks in the stimulus package phase out at different tax levels (see "So What's in the Stimulus for You? Nothing!"). The stimulus also includes a fix to the Alternative Minimum Tax--without the fix, millions of middle income taxpayers would have been hit by the AMT and forced to pay a higher tax bill.

But for high-earners, the biggest change will come from the tax increases the president proposed as part of his budget. (See "Who Will Pay for Obama's Plans?") Obama wants to allow the Bush tax cuts to expire at the end of 2010. If Obama gets Congress to cooperate, then beginning in 2011 single taxpayers earning more than $200,000 (more than $250,000 for couples) would see the top ordinary income tax rate rise to 39.6% from 35%.

Another tax code tweak unveiled in Obama's budget is a change to itemized deductions. Families earning more than $250,000 would take deductions against a 28% tax rate, instead of the tax rate they're actually paying. For many upper-income tax payers, this not only increases their tax burden but reduces their incentive to give to charities (see "Short-Changing Charities"). These changes too would require Congress to go along with it, something it might be less than thrilled to do if it hurts charities.

These are not the only changes to the tax code, let alone the only changes Obama intends to make to the country's economy. But these changes to the income tax system will be the most visible changes for most Americans.